How does debt consolidation work?

by Members Plus Credit Union

Americans average about four credit cards per person with an average balance of about $8,000. Add in a car payment and an outstanding medical bill, remembering to make all those monthly payments or struggling to meet the minimum payment are the main reasons people look at debt consolidation. Instead of making multiple monthly payments, consumers consolidate their debts into one monthly payment, often at a lower interest rate and monthly payment.

What Is Debt Consolidation?

Debt consolidation means applying for a new, lower-interest loan to pay off existing debts. Once the existing debts are paid, the borrower only needs to make a single payment for the new loan. For example, a consumer has $8,100 in debts spread over the following:

  • Credit Card 1. $1,000
  • Credit Card 2. $2,500
  • Personal Loan $4,000
  • Credit Card 3. $600

 

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